Re: Application of Rule 19b-4(m)

Dear Mr. Sexton:

Rule 19b-4(m) under the Securities Exchange Act of 1934 ("Exchange Act") requires each self-regulatory organization to post and maintain a current and complete version of its rules on its Web site. In addition, Rule 19b-4(m) requires self-regulatory organizations to update their Web sites within certain specified time periods to reflect rule changes. In your letter dated April 1, 2005, you request that the Division of Market Regulation ("Division") not recommend that the Securities and Exchange Commission ("Commission") take enforcement action against the National Futures Association ("NFA"), if the NFA reflects on its internet Web site a proposed rule change filed pursuant to Section 19(b)(7) of the Exchange Act within two business days after the Commodity Futures Trading Commission ("CFTC") approves the rule change or CFTC staff notifies the NFA that review is not necessary.

We understand the facts to be as follows:

Sections 15A(k)(3) and 19(b)(7) of the Exchange Act require the NFA, as a limited purpose national securities association under Section 15A(k) of the Exchange Act, to file with the Commission certain proposed changes to its rules governing security futures products and the activities of its members who are registered as brokers or dealers in security futures products pursuant to Section 15(b)(11) of the Exchange Act. Specifically, Section 15A(k)(3) requires the NFA to file with the Commission, pursuant to Section 19(b)(7), rule changes related to higher margin levels, fraud or manipulation, recordkeeping, reporting, listing standards, or decimal pricing for security futures products, sales practices for, advertising of, or standards of training, experience, or competence or other qualifications for security futures products for persons who effect transactions in security futures products, or rules effectuating the NFA's obligation to enforce the securities laws.1

A proposed rule change filed with the Commission pursuant to Section 19(b)(7) must be filed concurrently with the CFTC, and the proposed rule change may take effect upon filing of a written certification with the CFTC under Section 5c(c) of the Commodity Exchange Act ("CEA"), upon a determination by the CFTC that review of the proposed rule change is not necessary, or upon approval of the proposed rule change by the CFTC.

You state that, under Section 17(j) of the CEA, the NFA, as a registered futures association, may make a rule change effective ten days after filing the rule change with the CFTC, unless, within the ten-day period, the NFA asks the CFTC to review and approve the rule change or CFTC staff notifies the NFA that it has decided not to review the rule change. You represent that, although the NFA could make a rule change effective on the tenth day after filing if the NFA has not requested approval and has not received notice that the CFTC has decided not to review the rule change, in practice the NFA does not make a rule change effective until the NFA receives a letter from CFTC staff stating that it has decided not to review the rule change. Thus, under your current practice, an NFA rule change becomes effective upon the CFTC's approval of the rule change or upon the NFA's receipt of a letter from CFTC staff indicating that it has determined not to review the rule change.

As of May 9, 2005,2 Rule 19b-4(m) under the Exchange Act will require the NFA to update its Web site to reflect rule changes filed pursuant to Section 19(b)(7) within two business days after the NFA has been notified of the Commission's notice of the proposed rule change. The Commission's notice, however, could occur prior to the CFTC's approval of the rule change or the CFTC's determination not to review the rule change. Thus, a strict reading of Rule 19b 4(m) could require the NFA to reflect a rule change on its Web site before it becomes effective under the Exchange Act. You also note that it is possible for a rule change to become effective under the CEA before the Commission's notice is published. Accordingly, you request the Division to confirm that it will not recommend enforcement action to the Commission if the NFA reflects rule changes filed pursuant to Section 19(b)(7) under the Exchange Act on its Web site within two business days after the CFTC approves the rule change or within two business days after the NFA receives notification from CFTC staff that the CFTC has determined not to review the rule change.

Response:

Based upon the facts and representations set forth above, the Division will not recommend enforcement action to the Commission under Exchange Act Rule 19b 4(m), if the NFA reflects on its Web site rule changes filed with the Commission under Exchange Act Section 19(b)(7) within two business days after the CFTC approves the rule change or within two business days after the NFA receives notification from CFTC staff that review is not necessary. The Division's position is based on the representations you have made. Facts or representations different from those set forth in your letter may require a different response, and the Division's position is subject to modification or revocation if the facts or representations are altered.

Sincerely,

Elizabeth K. King
Associate Director

Endnotes

1 An NFA rule change relating to lower margin levels must be filed with the Commission pursuant to Sections 19(b)(1) and 19(b)(2) of the Exchange Act, and an NFA rule change that has been abrogated pursuant to Section 19(b)(7)(C) of the Exchange Act must be filed with the Commission pursuant to Section 19(b)(1) of the Exchange Act. See Section 15A(k)(3).